Company directors and managers are regularly confronted with the question of whether, and under what conditions, they may conclude contracts between themselves “personally” and the company they manage or direct.
Despite a constellation of situations with sometimes very different characteristics, case law and practice have finally identified a number of important principles, and the purpose of this article is to present them in a synthetic manner.
The following example, taken from a relatively recent ruling by the Federal Supreme Court, helps illustrate the issues involved and understand the solutions adopted.
Within a company of relatively significant size, various shareholder groups were in conflict. Following decisions taken at the general meeting and a series of resignations, the board of directors – originally composed of seven members – was reduced to two, Mr A and Mr B. Under the company’s internal rules, the two held joint signing authority, meaning that in principle they could represent and bind the company only jointly. Mr A sought to conclude a contract granting him very substantial remuneration. Aware that Mr A had a personal interest in the conclusion of this contract and that Mr B could not sign alone on behalf of the company, Mr A and Mr B agreed that Mr C, another employee of the company who was not a board member, would be granted (jointly by Mr A and Mr B) a special signing authority (jointly by two persons) to sign this contract on behalf of the company together with Mr B.
Shortly thereafter, the contract concerning Mr A’s remuneration was signed by Mr A for himself and by Mr B and Mr C for the company, Mr C acting on the basis of the signing authority delegated to him by Mr A and Mr B.
A few months later, another group of shareholders succeeded, at a subsequent general meeting, in securing the appointment of new directors and the removal of Mr A. The new directors scrutinised the contracts that had been signed while Mr A and Mr B were directors and concluded that the contract concerning Mr A’s remuneration was null and void; they therefore refused to pay Mr A. Litigation ensued.
In its ruling, the Federal Supreme Court, applying its established case law and in line with prevailing practice, recalled the following key points:
When the same person is a party on both sides of a legal deed, on the one hand on his own account, and on the other as representative of another person (a contract with oneself or double representation), there is a risk of a conflict of interest. Such a contract with oneself (or one concluded in a dual representative capacity) is inadmissible and, in principle, void, subject to two exceptions:
- The very nature of the deed excludes any risk of prejudicing the represented party; this is particularly the case when the transaction is concluded under arm’s length conditions; and
- The represented party has given prior consent or has subsequently ratified the deed.
These principles also apply to the representation of a legal entity by its governing bodies. According to the Federal Supreme Court, a legal entity is presumed to tacitly exclude the power of representation for any deed entailing a conflict between its own interests and those of its representative. Furthermore, prior consent or subsequent ratification of the disputed contract must emanate from a governing body of the same or a higher rank.
In this particular case, the Federal Supreme Court essentially considered that Mr A and Mr B had been unable to validly delegate representation authority to Mr C, because the delegation by Mr A was invalid. In fact, through this manoeuvre, Mr A sought to circumvent an obligation binding on him (if he could not validly represent the company himself in this situation, he could not validly delegate representation authority for this transaction either). Furthermore, neither of the two exceptions was satisfied: the remuneration provided for Mr A was not “under arm’s length conditions” (Mr A had not demonstrated compliance with “arm’s length conditions”, even if the remuneration appeared to be in line with the conditions applicable to other board members of the company!), and the company had neither given prior consent nor validly ratified the contract, since Mr C did not have the status of an organ of equivalent or superior rank.
Mr A was therefore denied the remuneration he claimed under the void contract.
The principles outlined above, established through consistent case law, clearly set out the conditions and criteria governing the conclusion of a contract with oneself within a company. It is essential that company directors and managers master them. Indeed, compliance with these criteria is crucial: otherwise the contract or deed is null and void.
Marco Villa
Partner, Geneva
